Dell Technologies Inc. has announced the formal spin off of its 81% stake in VMware, which is expected to occur during the fourth quarter of 2021.
This move marks an important milestone for Dell, as the spin off will unbundle the companies and create an independent and public VMware. By doing this, Dell aims to unlock the value of its businesses and create a more focused company with a clear vision.
Overview of Dell’s Spin Off of VMware
Dell Technologies, one of the world’s leading computer commercial companies, has recently announced plans to spin off its majority stake in VMware (VMW), the well-known cloud infrastructure and business mobility software provider. This much-anticipated deal is expected to close in the fourth fiscal quarter of 2020.
As a result of this action, VMW will become an independent publicly traded company and Dell will receive a tracking stock tied to VMW’s performance. The tracking stock will be exchangeable for Dell common stock in the future; however it is important to note that no cash payments are exchanged between Dell and VMware as part of this transaction.
Following the spinoff, VMW will remain Dell Technologies’ strategic partner enabling collaboration capabilities as both companies align their businesses while remaining independent. The primary benefit for customers is that they can now enjoy uninterrupted access to multiple solutions through individual contracts with each company, increasing flexibility and choice in their cloud strategy deployments. In addition, Dell’s shareholders may benefit from an improved dividend yield along with additional benefits related to greater clarity on valuation and cash flows going forward further beneficial to shareholders of both entities.
Background Information
Dell Technologies announced today that they have formally agreed to spin off their 81% stake in VMware to become a publicly traded comapny. This spin off is expected to be completed by the end of the fourth quarter of 2021.
In this article, we will look at the background of this move, its strategic rationale, and its implications for the tech industry.
Dell’s Acquisition of VMware in 2015
In 2015, Dell acquired Server virtualization pioneer VMware founded in 1998. The company had gone public the year prior and its stock surged following the firm’s announcement that it would acquire the software giant.
VMware rapidly grew in popularity due to its many features like virtual hardware emulation, incremental synchronization of machines among other features. The acquisition meant that VMware would become an important part of Dell’s strategy in offering comprehensive server solutions. However, at the time of the original acquisition Dell also announced plans to take VMware public as a separate consultancy company.
Now four years from that initial news, Dell has taken a major step towards fulfilling its intention when it first purchased Software Giant VMware. It recently confirmed reports that it has officially filed paperwork for VMware to be spun off from Dell technolgies into its own publicly traded company on the New York Stock Exchange at some point during fourth quarter of 2019 pending approvals from regulatory bodies and shareholders alike.
It’s believed this move will likely give rise to multiple opportunities both for customers and potential investors and unlocking substantial value from within the huge $90 billion IT services industry.
Recent Developments Leading to the Spin Off
In recent years, particularly in 2018, Dell Technologies has taken numerous steps to maximize its ability to deliver on its key strategic direction, including the spin-off of Dell Technologies’ 81% ownership stake in VMware. As part of this strategic shift, Dell Technologies completed some significant transactions in 2018 related to the performance and efficiency of its capital structure.
In June 2018, Dell acquired EMC Corporation and its controlling interest in VMware, making it one of the world’s largest independent technology companies. On December 28th, 2018, Dell announced a plan to separate its 81% ownership stake in VMware through a cash dividend distribution resulting in two publicly traded companies.
This spin off will help unlock the potential value for shareholders while positioning each company for future success as independent entities focusing on distinct corporate strategies and objectives.
Impact of the Spin Off
The spin off of Dell Technologies from VMware has been long anticipated, and Dell has now formally announced that the spin off will officially take place in the fourth quarter of 2021.
This separation will have deep-reaching implications for both companies, the stock market and investors, so it is important to understand the potential impacts of this spin off.
Impact on Dell’s Stock Price
The news of Dell’s spin off of VMware has caused a marked rise in the company’s stock price since the announcement. Dell shares closed at $59.05 on September 4th, 2020, up 7.4% for the day, for a year-long increase of 19%. In addition, as investors have reacted favorably to Dell’s strategic decision to simplify its structure and free up cash flow, its share price has also increased.
Analysts point out that this spin off is one step in capitalizing on the current high demand in cloud computing and IT services. In addition, by consolidating resources into VMware and allowing them to operate independently, they can build investor confidence while garnering greater capital needed to scale the business further.
The combination of VMware and Dell will provide investors with an attractive equity portfolio with exposure to public market opportunities and potential growth through investments in private companies focused on markets such as 5G/Wireless and Virtual Reality/Augmented Reality (AR/VR). In addition, investors are optimistic about both companies’ prospects going forward given their current momentum combined with their respective competency in technology solutions.
Impact on VMware’s Stock Price
The announcement that tech giant Dell is spinning off its 80% stake in VMware has significantly impacted its stock price. Immediately following the announcement, VMware’s stock price rose from its $124.00 closing price on July 11th to $146.87 at market close on July 12th — a gain of 19%.
However, despite this initial surge, some analysts have speculated that investors may be taking a wait and see approach due to Dell’s sizeable debt ($48 billion) and tendering offer process which could affect both Dell’s and VMware’s stock prices. By mid-July, the stock had dropped back down to what it was before the announcement according to Bloomberg data.
Since investors often hold onto stocks after mergers and acquisitions resulting in a price bump followed by an eventual gradual decline, these observations are common in such scenarios. Some analysts indicated that VMware would do better as an independent company because it would be free from Dell’s debt limit its growth potential moving forward as part of a larger group. Time will tell how this spinoff plays out for investors – but for now, VMware remains relatively stable with some fluctuations within 1% of its pre-announcement price range.
Financial Details of the Spin Off
Dell Technologies announced its plan to spin off VMware shares as a publicly traded company is on track. The spin-off is expected to take place in the fourth quarter of 2021, giving Dell more financial flexibility.
In this section, we will review the financial details of the spin-off and what it means for Dell and its shareholders.
Details of the Exchange Offer
Dell plans to separate its majority ownership stake in VMware via an exchange offer that will result in Dell distributing cash and/or a combination of cash and stock to holders of VMware tracking stock. In its release, Dell also noted that it would dissolve the Class V common stock, formerly listed as DVMT, and redeem the remaining public shares of DVMT at a redumption price equal to $109 per share. The exchange offer is expected to be completed by Q4 2020.
Upon completion, Dell will turn the equivalent of $9 billion in debt into equity in VMware and become the company’s largest shareholder with a majority economic interest. In addition, Dell will not receive any proceeds from the exchange offer ― payments will solely be made to existing holders of Dell’s Class V common stock. This is because the exchange offers are designed so that investors have the option to receive total consideration of approximately $23 billion (with principal levels) or participate in an alternative lower-priced exchange offer for cash or a combination of cash and shares equal to half the principal amount held by eligible investors.
The term “principal amount” represents shares owned plus any applicable market recoveries from certain repurchased notes belonging to investors who accept payment for their exported holdings under terms reflected within exchanges tender offers executed before this point. Registered holders participating in either of these exchanges should carefully consider which may be more beneficial ― particularly those closely watching their costs associated with paying taxes related towards two separate transactions receiving two sets of capital gain settlements resulting from redemption payments versus those obtained when accepting total consideration payments instead!
Details of the Distribution
On July 8, 2020, Dell Technologies announced plans for a tax-free distribution of VMware Tracking Stock (VMS), held by the company, to Dell Tech shareholders. The spin-off is expected to be completed in the fourth quarter of 2020, subject to certain conditions being met.
According to the company’s press release, shareholders will receive one share of VMS for every 11 shares of Dell Technologies (DVMT) they own as of 5 PM ET on the day before the record date. This distribution ratio includes a 5% stock dividend for DVMT shareholders. DVMT has over 1 billion outstanding shares and delivered total annualized return totaling 87%, since November 2017.
Dell Technologies is planning an offering and listing VMS on NASDAQ after completion of the Spin Off. Additionally, DVMT expects to increase its dividend by up to 50% within 90 days after closing and initiate share repurchases.This dividend increase and repurchase program will remain in effect while there are 331 million shares outstanding or until 2024’s first quarter earnings result are reported – whichever comes earlier.
Conclusion
Dell Technologies’ formal announcement of its plans to spin off its 81% stake in VMware marks the end of a years-long process that began in June 2018. The move, which Dell estimates should be completed by the end of 2020, follows Dell’s long-term strategy to increase its software and cloud market presence.
This article will briefly analyze Dell’s decision to separate its remaining stake in VMware.
tags = Dell, VMware, Spin Off of VMware, Dell Technologies, cloudl, large infrastructure OEMs, dell vmware 9.3b9.7b dell q4 dellgagliordizdnet, building out as-a-service models
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